Dividends retain their pull for investors

More than $630 billion in cash is on the books of Standard & Poor's 500 companies. Some of it is going somewhere, and investors are among the recipients.

Those big firms shelled out $224 billion in dividends to their investors last year, versus $202 billion in 2005 and $181 billion in 2004, according to Standard & Poor's Corp.

"This should be another positive year for dividend-paying companies, since they're doing well in terms of profits and cash flow," said Joseph Battipaglia, chief investment officer with Ryan Beck & Co. in Florham Park, N.J. "It will continue so long as the economy goes well."

Yet investors must make sure credit quality and financial viability of a company appear sufficient to sustain the dividend, he said. Ford Motor Co. and General Motors Corp. are examples of giant companies that cut dividends when their businesses stumbled.

On the other hand, Philip Morris parent Altria Group Inc. and telecom giant Verizon Communications Inc., each with a yield--or annual dividend divided by the stock price--of around 4 percent, are companies rewarding investors as they tackle long-term concerns, Battipaglia said.

"Dividends are popular because we're in an environment where we'll likely see a slower pace of price appreciation in stocks than we were used to in the 1980s and 1990s," said Jeffrey Kleintop, chief investment strategist with PNC Wealth Management in Philadelphia. "The last 11 quarters have produced double-digit dividend growth per share, a record-breaking stretch."

Increasing a dividend is better than maintaining it.

Bank of America, at about 4 percent yield, has had solid dividend growth the past five years, Kleintop said. Growth-oriented tech companies, which rarely gave dividends, are now in the game. Semiconductor firm Intel Corp. has a dividend yield around 2 percent, nearly the same level as consumer products company Procter & Gamble Co.Executive compensation had featured stock options with no immediate dividends before new accounting standards required that options be treated as balance sheet expenses. Firms are instead giving out shares that must be held for a set period, providing incentive for top brass to focus on dividends, Kleintop said.

A stock's yield isn't a constant, but fluctuates with share price.

"The impact of a stock's price on its yield is like a seesaw," said Sam Stovall, senior investment strategist with S&P in New York. "Unless you have an increase in the dividend payout, the higher the price goes the lower the yield will go, and vice versa."

Utilities and telecoms are among the industries with the highest yields, Stovall said, each averaging more than 3 percent. One quality selection is Duke Energy Corp., yielding more than 4 percent. Among financials, diversified global financial firm Citigroup Inc. yields more than 3.5 percent.

An abnormally high dividend yield may lure investors but should be a warning flag rather than inviting call, Stovall added: It may not be sustainable.

Increasingly popular exchange-traded funds, or ETFs, provide a handy and economical way to get in on high dividends. ETFs hold baskets of stocks and are traded during market hours with no minimum investment or penalties for redemption. Annual fees are generally lower than those of mutual funds, though you do pay trading fees.

For example, the $7.8 billion iShares Dow Jones Select Dividend Index Fund tracks the Dow Jones U.S. Select Dividend index. It was launched in 2003 to take advantage of the reduction in individual income tax rates on dividends to a maximum of 15 percent. The index consists of more than 100 stocks that have positive historical five-year dividend-per-share growth.

"Investors can use dividend ETFs to invest in higher-yielding stocks with the potential for capital appreciation," said Jane Leung, senior portfolio manager of the San Francisco-based iShares fund, which she considers best-suited to investors with modest risk tolerance. "Over the longer term, we generally have seen both overall stock prices and dividend payouts climb."

"Our management techniques enable us to optimize and exceed the yield of the index," Leung said.

Real estate investment trusts, or REITs, aren't the hot prospects for income they once were, Battipaglia said.

"REITs were darlings of market performance in 2004 and 2005, had positive returns last year and may do so again in 2007," he said. "But they're now less attractive to investors because their dividend yields, previously higher than Treasury rates, are less than Treasury rates."